RBI disclaims regulation of non banking financial sector(NBFC) LLPs

 In an earlier blog post in Jan-13, I'd written http://financeandcapitalmarkets.blogspot.in/2013/01/warren-buffets-investment-partnerships.html that RBI regulations apply to NBFCs(non banking financial COMPANIES) and not to firms, why should the LLP be subject to this? Section 14 of the LLP Act 2008 states that On registration, a limited liability partnership shall, by its name, be capable of.....(d)  doing and suffering such other acts and things as bodies corporate may lawfully do and suffer. Section 2(d) of the LLP Act2008 defines body corporate.... “body corporate” means a company as defined in section 3 of the Companies Act, 1956 (1 of 1956) and includes..Therefore, since LLP is a body corporate under the Act and subject to other acts applicable to body corporates, the RBI NBFC norms will apply to it to the same extent that they would apply to companies. 

However, in its circular yesterday, the RBI expressed the view that
rbi.org.in/scripts/FAQView.aspx?Id=92  LLPs are regulated by the Ministry of Corporate Affairs and not by it. Is this a case of regulatory arbitrage, given that LLPs are explicitly an alternate to private sector companies? And more importantly, will the Registrar of Companies dispense with RBI approval for LLPs on the basis of this circular? only time will tell.

TCIs lawsuit against Coal India-legally and morally flawed

I wrote a post on this at my other blog, do take a look(http://apoliticallyincorrect.blogspot.com/2012/05/tci-sues-coal-india-morally-and-legally.html). While I rarely toe the Government line, this issue seemed too unfairly portrayed in the mainstream media to pass up!

Verifying DIAL financial model used in tariff-AERA use of consultants apt?

GMRs demand for 6x-8x tariff increase for Delhi Airport,  made for severe media and interest group scrutiny, as people were mentally reluctant to accept this tariff shock. Hence, the aviation regulator AERA thought it fit to have extensive consultations etc, and released a consultation paper in Jan12 inviting comments by Feb29,2012. While reading that consultation paper(CP-No.32/2011-12-Determination of Aeronautical Tariff –IGI Airport, New Delhi, read it http://aera.gov.in/writereaddata/consultation/116.pdf) I noticed a very interesting section from para 21 onwards which stated that in order to analyse, review and advise on the financial model used by DIAL as a part of their tariff application, the Authority appointed Consultants. The scope of the assignment included

1. Review and assessment of the models' arithmetic accuracy:-independent cell-by-cell  inspection and sheet-bysheet review of the arithmetic accuracy of formulae and calculations contained in the model including tracing items through the various interlinked sheets and calculations back to the input data and verifying the correct application of addition, subtraction, multiplication and division based on standard business and financial logic
2. Check for logical and calculation integrity of the models verifying that the links within the model are working accurately; assessing that any macros that govern calculations in the model are running as intended; assessing that the model is logically constructed, internally consistent with respect to calculations and formulae and is fit for the purpose of undertaking analyses of relevant  aspects for tariff determination by the Authority; assessing that assumptions in the Financial Model are at one place and that there are no hard coded numbers in calculations in the Financial Model that might influence calculation results in unexpected ways and checking whether the assumptions listed in the assumption sheet are getting correctly reflected in the various sheets of the financial model.  
3. Consistency check with key agreements/documents:- Further, the Consultants were also required to ensure that the Financial Model accurately reflects the concession offered by the Central Government with respect to the key agreement(s), and financial documents as also the provisions in the Act. The tasks here included consistency check for incorporation of provisions from key agreements related to various Building Blocks into the financial model.
4. Assistance in undertaking certain sensitivity analyses. The Consultants were further required to provide assistance to the Authority in identifying such elements that may need to be certified from auditors /Chartered Accountants of DIAL of key aspects/ assumptions taken from the key / concession agreement(s) and also assist the Authority in reviewing the implications/change in results through sensitivity analysis of various factors like growth rate in traffic, inflation etc., to be conducted with respect to specific changes to assumptions for a factor or even reviewing the drivers and projection bases for such factors. 

I agree that financial modelling is not easy, in fact there are entire specialized courses on the subject and that the very complex issues in this(as opposed to power/roads/ports) may have prompted the authority to seek external help. But while the first two aspects could have warranted taking a consultant's help for Excel alone, the consistency checks and sensitivity analyses surely comes within the expected circle of competence of the regulator. Maybe they did not want to risk mistakes in such an important case and so they engaged consultants. Also to be fair, even other regulators do engage consultants to advice on tariffs petition process(but they are not explicitly acknowledged in the orders), so maybe I'm just shooting the messenger(AERA) who was upfront in admitting this, even if for the purpose of protecting themselves against subsequent judicial review. But for anyone in the infrastructure finance field either as preparer, auditor or banker, the above process used by AERA is quite instructive

How the RBI prevents banks from being 'too connected to fail'

Post the 2008-date financial crisis, there is increasing recognition that besides size, risk and profitability, interconnectedness of banks is another key consideration for the banking system to consider. In his speech titled 'Indian Banking- Journey into the Future', at the Bancon-2011 at Chennai on November 6, 2011(http://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=660)  the Deputy RBI Governor Anand Sinha made a host of interesting points amidst which I focus on this aspect. The points in bold italics are made by him, with my following commentary.

1. prudential limits on aggregate interbank liabilities as a proportion of banks’ Net Worth:- This measure ensures that banks do not lend to each other and create a chain. That is why even equity investments in other banks is deducted for the purpose of calculating regulatory capital.
2. restricting access to uncollateralized funding market to banks and Primary Dealers with caps on both borrowing and lending:- Repo lending is asset backed, but unsecured lending could pose problems later. Hence, these restrictions force banks/PDs to solve their problems using the capital markets instead of subjecting other banks to their systematic risk
3.  increasingly subjecting NBFCs to more stringent prudential regulations:- NBFCs and banks increasingly compete for the same customers, investors and depositors. Yet, NBFCs are not regulated to the same extent, most importantly when it comes to priority sector obligations and branch audits.
4. restricting banks’ exposure to NBFCs to contain regulatory arbitrage:- Banks used to view NBFCs as a easy way to fulfill their priority sector lending. That is why microfinance companies and gold loans companies profited from the access to assured cheap funding till the AP crisis/RBI diktat respectively
5. Financial Stability and Development Council (FSDC) monitoring inter-alia, financial conglomerates:-Since issues with one arm of the conglomerate may cause run on the banking arm, RBI prefers to go for integrated monitoring and ring fencing via Bank Holding Company structure etc. Also, it aims at improving financial sector regulatory coordination to reduce arbitrage, and thereby lower the risk of interconnectedness. 

All these are noble goals and good tools, so I hope they stand the test of time.

The case for SEBI to permit traded long term listed equity options(LEAPs)

With Indian equity markets still inefficient, there is ample value for active investing strategies. In that regard, long term equity options would be a great vehicle, also to give more impetus to activist long term investors who cannot adopt leveraged strategies. Abroad, LEAPs( Long Term Equity Anticipation Security) exist to allow investors to take a long term call on stocks(either put or call). As Keynes rightly said(and firms like LTCM/Lehmann realized), the market can stay irrational for longer than you can stay solvent. Even a three month option is quite risky for an investor, but for a long term option(say 1yr/2yrs), there is reasonable hope for market prices to correct by then.

1. Court cases take upto 2-5yrs(at the minimum even at the apex level) and therefore LEAPs would be a great way for investors with legal acumen to take a considered bet on the outcome. For example, Bajaj Auto's right to purchase 24% of Maharashtra Scooters at a bargain basement price from the Maharashtra state government, is under dispute at the Supreme Court. An adverse outcome for Bajaj Auto could send the Maharashtra Scooters price skyrocketing as investors finally see value unlocking. Another example is the RIL-RNRL dispute over pricing of natural gas, on which LEAPs on RIL could have been profitable. 
2. To attract activist investors like hedge funds to improve corporate governance and encourage long term value creation, LEAPs are needed to encourage those investors to improve the company instead of voting with their feet and exiting.
3. While companies DO issue warrants, that is usually done as a preferential allotment to investors, restricted to 18months and need 25% advance(not option premium but advance), and can have only one minimum conversion price at allotment time-that fixed by the SEBI DIP guidelines.
4. If we want to encourage the long term informed investing culture, LEAPs are good because it could make investors bet on long term trends and their awareness of stock specific factors. 
5. Insider information could be used much better, because insiders can trade on LEAPs(provided they hold it to maturity/for atleast fixed period post silent period of trade) without affecting the share price, yet they could provide valuable pricing signals. 

What I suggest would need changes in SCRA Act, SEBI Act, FDI guidelines etc, and is easier said that done. But it could really give the equity markets a boost, and effort is still worth it. 

Interesting features of THE REAL ESTATE (REGULATION & DEVELOPMENT) BILL, 2011

I read the draft version of this bill(http://mhupa.gov.in/W_new/RealEstate_BILL-2011_OM09112011.pdf) and was quite impressed at some of the provisions. Though laws do not bring about change without good implementation, the Government is atleast thinking on good lines. Essentially, the Act aims to ensure fairplay by promoters, have a single web portal for accessing details of approved projects and to have a single pan India tribunal for disputes. Some interesting clauses below and their implications are detailed below.

1. INTEREST  RATE SYMMETRIC:- Section2(u) “interest” means...Explanation.- For the purposes of this clause, the rate of interest chargeable from the allottee by the promoter shall not be more than the rate of interest which the promoter would be liable to pay the allottee in case of default. If only this provision was applied to tax laws also(where Government pays 6% pa on delayed refunds while taking 18% interest for late payments, tax payers would be much more happy. On a lighter vein though, this clause will ensure fairplay in contracts.
2. PROJECT SPECIFIC REGISTRATION:- Section 3. No promoter shall develop any immovable property.. without registering the real estate project and obtaining a certificate of registration from the Real Estate Regulatory Authority established under this Act:  Explanation.- For the purpose of this Act, where immovable property is to be developed in phases then every such phase shall  be considered a standalone real estate project, and the promoter would have to seek registration under the Act for each phase separatel. This would imply that projects need to be registered once on the site, and that even further phases need a distinct registration, which is good.
3. ESCROW ACCOUNT Section4(3) The promoter shall enclose the following documents along with the application referred to in sub-section (1), namely:-(b) (v) that seventy percent of the amounts realized for the real estate project from the allottees, from time to time, would be deposited in a separate account to be maintained in a scheduled  bank, within fifteen days of its realization for meeting the costs of the real estate project and would be used only for that purpose. Completion risk is one thing that has hogged the limelight. Having an escrow account would entail another audit, but would ensure that the project gets completed on time! Now, residential projects cross funding commercial projects may not happen anymore
4. TRANSPARENT MARKET DATA:- Section8. (1) The promoter shall..enter all details of the proposed project ..(2)  The information and documents referred to in sub-section (1)..include,- (g) fortnightly up-to-date list of bookings on the basis of the agreement to sell entered with them. This would ensure that buyers have an accurate assessment of which projects are selling, and this information would allow them to make purchase decisions and in negotiations.
5. 'PRE-FILING CONDITIONS:- Section 9- No promoter shall issue or publish an advertisement or prospectus, or invite any member of the public to buy or book in such projects to be developed or take advances or deposits without obtaining a copy of certificate of registration with the Authority. (2) No promoter shall issue advertisement or prospectus without first filing a copy of such advertisement or prospectus in the office of the Authority/ This borrows several provisions from SEBI Guidelines for equity funding, which is quite interesting in itself! Atleast it would ensure some uniformity in advertisements and 'prospectus'.

However, there is no rose without thorns. The possible cons of the bill are

1. Excessive reliance on the internet:-Since not all realty buyers may be conversant with English/be digitally savvy, the proposed web portal needs to be in multiple languages, and accessible via other modes like mobile etc. 
2. Too small threshold limit for Act:-Since projects above 4000sqfeet carpet area are covered, this would realistically cover any decent size building. While this may be the intention of the act, one wonders whether small builders can bear this compliance cost or not. So either build a NSDL/MCA-21 CFC like compliance infrastructure in place, or else increase the applicability limit for the Act

Like most Indian laws, this is high on intentions but it is to be seen whether it is implemented or not. If implemented, it could go a long way in cleansing the Augean stables of realty. 

Will the RBI guidelines on bank staff compensation lead to spur in FRM demand?

In Jan-2012, the RBI(India's banking regulator) announced the Indian version of the Financial Stability Board(FSB) guidelines of 2009, which set principles for banking compensation that aims to align risk with return, ensure independent director oversight etc. The principles can be read here(http://rbi.org.in/scripts/NotificationUser.aspx?Id=6938&Mode=0) and are effective from the Mar12 fiscal onwards.

While the principles come as no surprise for risk taking staff(clawback/deferral etc), what is interesting is the recomendation for higher base pay for control function staff, as can be read below.

2.2 Guideline 4: For risk control and compliance staff

2.2.1 Members of staff engaged in financial and risk control should be compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the bank. Effective independence and appropriate authority of such staff are necessary to preserve the integrity of financial and risk management’s influence on incentive compensation. Back office and risk control employees play a key role in ensuring the integrity of risk measures. If their own compensation is importantly affected by short-term measures, their independence will be compromised. If their compensation is too low, the quality of such employees may be insufficient to their tasks and their authority may be undermined. The mix of fixed and variable compensation for control function personnel should be weighted in favour of fixed compensation.

2.2.2 Subject to the above, in devising compensation structure, banks may adopt principles similar to principles enunciated for WTD/CEO, as appropriate.

The above principles would imply a high base pay, skewed towards fixed amount. The last time the compensation of employees was delinked from their business unit performance(as happened for equity research analysts whose bonus was delinked from investment banking revenues), that did not reduce the pay much as banks still set bonus in a black box type approach, which DOES consider investment banking revenues as well. But because RBI has plugged the loophole of high bonuses in its guidelines, it should ensure a good fixed pay. 

Qualifications like FRM are not as popular(yet) as CFA in India, because the risk function is still not as respected/well paid. But with such remuneration norms coming in place with the elevation of the rusk function, this should change. One of the reasons Goldman Sachs has been relatively unscarred by any crisis, is the competence and organizational profile of its famed control function. The sooner other banks realize this, the better it is for the industry and for risk management professionals.

Learnings from Sandeep Parekh's course on Securities Regulation at IIM Ahmedabad

I must confess that before this course, I'd not heard of Sandeep, even thought he's a noted securities lawyer(having argued the Azadi Bachao Andolan case, and was ex-Legal Head of SEBI). But after the course, I must say that his rather unique style was really useful to me. Some key takeaways from the course
DISCLAIMER:- Based on personal memory/notes, so any errors in this are most likely mine! 

1. Securities are not produced-they are created. And being intangible evidence of ownership in something tangible('company'), the prospectus needs to specify clearly WHAT that something is. 
2. Administrative(or quasi judicial), civil and criminal penalties can ALL be levied in a case, as the double jeopardy bar applies ONLY to criminal proceedings
3. He felt that insider trading hurts dealers and speculators the most as they trade the maximum volumes without having access to inside data like how one-off insiders do. That is a very interesting view since I felt that people 'in the market' like these would also have access to that information eventually. 
4. Indian security law does not start and end with SEBI Act/regulations, it includes whole host of other regulations like Companies Act, Exchange regulations etc. 
5. Ignorance of law is no excuse, so before executing any major corporate decision, one should consider the securities law consequences especially those of informing exchanges, insider trading, market manipulation, stock option repricing etc. 
6. In case big trades are executed, risk always exists of insider trading/manipulation accusations. Hence, document the trade internally and try to back it up with external research reports if any.
7. Unlike quasi judicial bodies like SAT, SEBI has legislative, administrative and judicial powers.
8. The 'Enforcement Dept' does not actually enforce anything, but argues for SEBI during appeals..
9. For fraud, one would need to prove mens rea, omission when duty to speak/commission, reliance, loss causation and materiality, damages and transaction causation. In plain English, that would mean a hell lot of stuff! 
10. If primary liability exists and abettor aware of it, then 2ndary liability possible if knowledge of that.
11. Care, Diligence and Loyalty are main fiduciary duties

The course was a lot more than that, but now my fingers ache from typing out so much! Overall a very interesting course and reflects his creativity in the course design and use of prezis for creating the slides.

How the Indian Government/Regulators are creatively using checklists

Auditors have known the importance of checklists for long. Indeed, the audit programs are nothing but formalized and modified time tested checklists. But while auditors are trained to avoid the checklist 'tickbox mentality' and to 'think beyond the checklist', the same has not yet penetrated the compliance mindset. There are a plethora of laws/regulations/rules which need checklists. A few are listed below

• Corporate governance compliance checklist to be filed by listed companies with the stock exchange under Clause 49 of the listing agreement
• CARO 2003 checklist to be attached to the audit report, under the Companies Act 1956
• Due diligence checklist to be filled by the merchant banker and mentioned in prospectus
• Compliance calendar and checklists used for routine compliance purpose
• Due diligence checklists used during M&A, to ensure that no liability is missed out
• Pre-filing validation for e-forms/tax returns/TDS returns to ensure that the mandatory requirements are satisfied, and that wrong data/inappropriate numbers are not filed. This is indirectly using the same checklist manifesto. .

 However, all these checklists are dstatutorily mandated. There is tremondous scope for using checklists even for non routine work, to ensure that nothing is missed out. While this may implictly be done during audit planning, it would not hurt to have an output checklist to service as a work guide AND a milestone reference. As Atul Gawande's seminal book 'The Checklist Manifesto' apttly puts it, even highly skilled professionals may commit mistakes unknowingly out of habit, unless they internalize a checklist and bother to update it often. In case of CAs, professional judgement instances such as client acceptance, audit qualification, degree of audit evidence/sampling etc are all cases where a checklist would be very useful to ensure internal consistency. Other innovative ways to use checklists are

• Tickoff legal agreement clauses against desirable elements, to check for contract completeness and unusual terms. For example, an outlicensing agreement without audit rights, IPR reversion at end of term etc, is unusual to say the least, and may signal legal risk later on. This is done when approving VGF requests. This practice should be more widely followed.
• Using cross checks in tax returns check/PDS eligibility determination etc.

Safety first-IRDA investment management regulation.

      I compiled the below analysis from the various IRDA regulations in force. Those interested are welcome to    browse the IRDA website to locate these and more. The LIC 'deficit' allegation did tarnish IRDAs image a bit but then LIC is the 800pound gorilla of Indian insurance/investing, which can get away with murder! Below are some examples of how investment managers of insurance assets are put on a tight leash.

1. Except the role of independent investment advisor, insurance companies cannot outsource any of the investment management function. And the limited outsourcing allowed(asset class specialist/NAV calculation agent) cannot be charged to policyholders account , but must be borne by insurance company itself.
2. While the Front office(fund manager+dealer) reports to CIO(Chief Investment Officer) who reports to CEO, the Middle office/Back office report to CFO. As both CIO/CFO report to CEO, there is some balance of control between front office and its control functions(middle/back office)
3. Also, transfer of data   from Front Office to Back Office is 100% electronic(no manual intervention, even faulty data can only be rejected NOT edited), to avoid chance of cooking the books post transaction.
4. For valuing quoted securities, market value is accepted only for quote not older than 30days. Otherwise, book value(net of provisions) is used. This heavy penalty would incentivize investment in liquid stocks, OR having a 'friendly broker' to trade in those shares prior to accounts closure. In contrast, SEBI permits using good faith valuation methodologies based on DCF, which incorporate the liquidity discount.
5. To avoid the excuse of 'ratings dependence', IRDA clearly specifies(wef Aug'08) that rating is not a substitute for risk analysis(quite obvious but then the most simple things are often overlooked).

Safety first-how IRDA regulates investment management in insurance industry

Given the vast AUM of the insurance industry, investment management is a big business there. So the regulator(IRDA) has guidelines for that, which Chartered Accountants are asked to certify the company's compliance in that regard. Some of these guidelines are;-

1. Seperate front office from middle office/back office. Former reports to CIO and latter report to CFO, so CIO cannot hide trade data
2. Automatic data transmission from Front Office to Middle Office w/o scope to manually edit. Back office cannot rectify wrong data but only reject it
3. For AUM>500Cr, fund manager cannot be the trader
4. Outsourcing ban with limited exceptions-that too to be paid for by shareholders fund not by policy holders. At first blush, it seems unfriendly(why insist on expense in house handling) but then one should remember that outsourcing core competency(investment management IS one for this industry) is frowned upon by regulators, and by others.
5. For security not traded within past 30days, book value used. Much stricter than SEBI which allows DCF valuation with appropriate liquidity discount. 
6. Mandates extensive use of automation, especially for cash management and generation of routine/exception reports. Also, investment limits(sector/caps/liquidity/mix) are preset in the system, to ensure alerts before the trade happens. IRDA mandates this.

To their credit, the sector has never had a publicly reported major scam. So IRDA does seem to be on a right track in this regard.

Converting Capex to Opex-can infrastructure lessons work in finance?

During my Transport Infrastructure(TI) classes here at IIM-A, Prof G Raghuram introduced the class to a framework of analyzing infrastructure as three distinct segments, each with its own risk-return tradeoffs, competition characteristics and investment rationale. They are Terminals/Right of way/Rolling stock. This is further elaborated below(note that essentially they have the principle that specialist operators take over capex headache, and charge opex to the users).

1. Right of way:- Getting the license to lay cables/fly airlines/build towers. Typically, this involves liasons with regulators/local authorities/government. Usually a legal monopoly, and if a private sector player gets it, it becomes a natural monopoly due to the poor economics of duplication.
2. Terminals:- These are the fixed departure/termination points between which rolling stock(vehicles etc) moves. They supply all the operating infrastructure and deftly schedule competitors. 
3. Rolling Stock:- Planes, buses, coaches, wagons, ships fall in this class. They are the actual revenue earning assets, which depend on the first 2 segments for being able to operate. There is no voluntary open access at all here, and maximum customization/differentiation is possible. Usually unregulated(wrt returns) and the sweet spot for private players due to low cost of entry, low entry barriers etc. 

 The above framework applies to nearly all infrastructure sectors whether it be telecom(laying wires/towers/handsets-spectrum), rail(tracks/stations/coaches), ships(flags/ports/ships). The underlying principle at play is that asset ownership/operation, and asset utilization require drastically different competencies. While fixed asset management would need maximum utilization(open access), efficient cheap service etc; its utilization would depend on competitive dynamics and the ease of entry for market players. Earlier, regulators used to bundle the license('right of way') with the necessity to set up one's own physical infrastructure('terminals'/'rolling stock'), but now the realization has set in that operating the asset may not need physical assets-sharing agreements can take care of that. Hence we have toll collection companies, MVNOs etc, who bring their expert skills to get the best out of the infrastructure.

In case of banking/finance, this paradigm is slowly getting in place. Take the following examples:-

1. Hedge funds can now use their intellectual capital('rolling stock') to access the prime broking infrastructure of their investment banking competitors
2. Insurance companies/mutual funds can piggyback on their banking partners to sell products, instead of taking the pain to set up branches. 
3. For expanding the access of retail banking, RBI suggests bank agnostic banking correspondents, who will have machines able to operate any bank's account.
4. The idea of intraprenuers within organizations/financial supermarket in a retail bank branch, hinges on the idea that creative ideas/cross selling can best utilize the infrastructure already in place. 
5. ATMs('terminals') are now nearly open access due to the number of free transactions(5/month) for ALL banking customers. Hence, new banks(aka 'rolling stock'!) can devote less resources to this aspect and focus on customer service and innovation
6. Incubation centres/Industrial parks/business centres/single window clearances(presently non banking scenario only) focus on this same principle of relieving headache of the formalities/heavy investments. 
7. Outsourcing trend seen in financial services(IT/Manpower/office space/accounting) and elsewhere, is reflective of this trend,\

This post IS a bit random but should hopefully spark some thinking

So why do corporates hate jury trials/court processes?

Right from an employment contract to an ISDA agreement, two standard clauses leaps out at you 'waiver of jury trial', and 'arbitration clause'. That dashes any hopes of staging 'The Runaway Jury' type Grishamseque trials, and wheedling out millions of filthy lucre for any supposed offenses. From the corporate's point, you cannot fault it. Typically, their counterparties would be less sophisticated(individuals or SMEs or even other interbank parties at times), and would evoke more sympathy from a jury of their peers. Though one signs away the right to challenge the fairness of contracts etc, when the interpretation of law enters grey areas; when the issue comes about discretionary/punitive damages and emotions come into play, then juries can even ignore the 'true intent' of law and instead apply common commonsensical principles.

The famous Nanavati murder trial in India(1950s) is a classic case where despite a confession, the jury found the decorated naval officer not guilty by way of insanity of murdering his wife's lover. That case(where the jury verdict was declared a mistrial) led to abolition of jury trials, and now common law systems like India rarely have them. Modern corporates have learned at considerable expense(ask any tobacco company!) about how much juries may feel for the underdog. And now judicial activism(judges bend the legal interpretation to achieve their own version of social good over legal correctitude)  is plaguing countries like India. So now, arbitration is the in thing, specially to decide over technical matters/highly specialized issues like construction, finance etc. The advantage of this for frequent users is that the arbitrator(like an auditor) is beholden to the corporates for his appointment, so he may take their side in case of ambiguity. Also, the verdict(called 'award') of the arbitrator cannot be easily struck down for technical grounds(like alternate view possible etc).

High legal costs in the court system are not the only demerits of going to court. The (un)welcome publicity, disclosure of information, interrogation of key executives etc accompanying it; all these are good reasons to avoid court. That is why 'out of court' settlements are quite common, specially where the lawsuit may carry a reputation risk  as in most financial sector related lawsuits.

Set a thief to catch a thief-the way to plug India's regulatory loopholes

The appointment of UK Sinha as SEBI Chairman got me thinking as to why we do not have more regulators who are from the private sector. Unlike Mr Sinha who was heading UTI AMC(a private sector body), the previous SEBI Chairmen were generally career IAS officers. The argument against allowing private talent into such senior regulatory positions generally is

1. The revolving door between public and private sector may reduce the independence/objectivity of the regulators. Restrictions on private sector appointments are not really enforced..and then one cannot debar 'consulting' and other assignments
2. Demotivates the career cadre regulatory officers. 
3. The in house staff may have seen a wider range of issues/scams than anyone working in industry

While the above arguments are valid, past evidence may swing the pendulum towards industry professionals. For example, the first SEC Chairman Joe Kennedy was a noted market manipulator but the security laws he wrote have stood the test of time.

Industry bodies are unlikely to propose changes which adversely impact them yet it is the industry professional who knows the loopholes and how they are played. The question is-who will relinquish a plum industry post to enter regulation? To that, a post retirement post could be created.